Wednesday, November 30, 2016

The Conversation You’d Better Have with your Financial Advisor: Medicare Reform

The Conversation You’d Better Have with your Financial Advisor: Medicare Reform

Don’t Be Distracted by a Tax Break:  This missive is addressed to middle-aged Americans who are gainfully employed and receiving health insurance benefits through your employer.  I urge you begin looking at (or if you don’t have one, thinking about) your retirement plan in the coming months.  Your financial advisor is likely to tell you about all the potential breaks that may find their way into a major piece of tax legislation next year.  Whether you are a Democrat, Republican or Independent, you’ll look favorably upon a bill that saves you a little bit of money.  However, the tax bill is prelude to and will make a necessity of entitlement reform.  Once the new Congress and President have eliminated hundreds of billions in revenues and repealed the Affordable Care Act, they will have to “reform” Medicaid and Medicare[1].

A joint effort with my 3-1/2 year old granddaughter

Since you are gainfully employed, you probably don’t think Medicaid reform will have a bearing on your long-term wellbeing.  You are probably right, but you’d be surprised how many elderly people burn through all their savings and wind up on Medicaid at the end of their lives.  For now, we’ll set that aside as a remote risk. 

An assumption about health insurance in retirement that won’t be valid anymore:  It’s Medicare reform that should be getting your immediate attention.  You have probably assumed that you don’t need to plan on spending large parts of your retirement income on insurance premiums, co-pays, and deductibles.  Between Medicare Parts A, B and D and supplemental insurance, you think you’ll be fully covered in retirement.  What you haven’t done is to build the potential costs of hospitalization, doctors, or drugs that won’t be covered under Medicare reform.  You’d better start getting familiar with Speaker Paul Ryan’s Medicare reform plan and Health and Human Services Secretary-designee Tom Price’s health care reform proposal, because they intend to shift the risk of health insurance onto you.

The government will, undoubtedly, continue to provide a subsidy for senior health care, but the subsidy will not cover the cost of today’s Medicare’s suite of services, and you are going to have to go into a marketplace to buy the insurance from private insurance companies.  Sound familiar?  While the House Speaker would vehemently deny it, his reform looks like Obamacare for seniors.   

If you get insurance through your employer, the real cost will shock you: If you get your insurance through your employer, you have no idea how much insurance really costs unless you work in H.R.  Many of my friends with employer-provided health insurance complain about rising co-pays and deductibles.  The increases are tiny compared to increases in cost for small businesses and individuals  (see, http://meditationonmoneymanagement.blogspot.com/2016/11/repeal-and-replace-aca-its-called.html).  You might ask someone who is running a small business or buying an individual policy to give you a ballpark figure.  You are going to face that figure, less a subsidy, plus a great deal of health care inflation.

The details of Medicare reform are uncertain, the consequences to retirement plans will be material:  At this point, we don’t know who will remain eligible for the current Medicare program, and we don’t know what the subsidy will be.  What we do know is that the bigger the tax cut, the less room Congress will have to grandfather in some beneficiaries and provide money for insurance subsidies.

Many middle-aged folks aren’t saving enough for retirement as is.  Medicare reform is going to make the financial road to retirement even steeper or keep you in the work force even longer.

Don’t tell me this isn’t going to happen because Congress would never privatize Medicare.  I didn’t think Donald Trump would become President either.  The forces are in place to privatize Medicare, and the negative consequences aren’t immediate.   Thus there’s every possibility that while you are gleefully spending your tax cut next year, Congress and the President will be creating a huge hole in your retirement security.  You might ask your financial advisor how much you should be setting aside to cover your health insurance needs after you retire.






[1] Although Medicare funded through a payroll tax, its dwindling surplus is invested in US Treasuries.  In other words, Medicare’s surplus mitigates the deficit.  As tax revenues are slashed and the Medicare surplus dwindles, Congress will feel immense pressure to extend the Medicare surplus to keep the deficit from exploding.

Wednesday, November 23, 2016

The Danger of Large Campaign Loans: The Sad Case of Meg Scott Phipps

The Danger of Large Campaign Loans: The Sad Case of Meg Scott Phipps

In 2000 Meg Scott Phipps, the candidate for Agriculture Commissioner of North Carolina, funded her campaign with over $500,000 in loans from her family.  Those loans were the beginning of a long road that led to Meg Scott Phipps’ conviction in 2004.   Ms. Phipps won election and soon thereafter began using her new office to help deal with the loan.  According to Ms. Phipps’ indictment, she used her office to solicit illegal campaign contributions from state fair concessionaires.  In addition to serving a prison sentence, Ms. Phipps’ family eventually had to forgive the loan.



In 2016 Dale Folwell, the candidate for State Treasurer of North Carolina, funded his campaign with over $500,000 in personal loans (see, “For North Carolina’s Treasurer-Elect the Biggest Challenge is Judgment [November 18, 2016]).  As I wrote recently, Mr. Folwell hasn’t done anything illegal, and I am not predicting that he will do anything illegal to satisfy the $500,000 loan he made to his campaign.  However, Ms. Phipps’ sad saga is instructive about the pressures that can cloud the judgment of public officeholders when their personal financial houses are not in order.

The SEC has rules that severely limit campaign contributions from anyone who manages or seeks to manage pension investments.  Under those rules in-state contributors are limited to $350 and out-of-state donors to $150.  Thus, Mr. Folwell cannot readily retire $500,000 in debt directly from money managers.  However, there are plenty of financial institutions, lawyers, and other business interests that would see a great advantage in helping the incoming State Treasurer solve his debt problem.  The Treasurer’s office has contracts for various forms of recordkeeping, custody, and administration.  The Treasurer serves on many state boards, including education and banking.  While many of Mr. Folwell’s devoted followers expect little in return for their support, Mr. Folwell will have to take money from parties who make (but never admit it) campaign contributions because they expect something in return.

Campaign contributions are a necessary and corrupting aspect of politics.  However, when a candidate finances an election with a large personal loan and expects to be reimbursed, bad things have a way of happening. 




Note:  In my initial post, I said that I could not find any securities licenses for Mr. Folwell on the Investment Advisor Data Base.  Upon further investigation I learned that the SEC removes inactive licensees after ten years.  The SEC has removed my information on my registrations and presumably Mr. Folwell’s as well.  Mr. Folwell was a broker or investment advisor at Merrill Lynch and Deutsche Bank, Alex Brown.

Tuesday, November 22, 2016

Remain vigilant: Trump “reforms” will tempt Democrats – “Carried Interest”


Remain vigilant:  Trump “reforms” will tempt Democrats – “Carried Interest”

Many among the 53% of all voters who did not vote for Donald J. Trump are counting on the leadership of Senator Charles Schumer (D-NY) as one of the last lines of defense against the President-elect’s legislative agenda.  No doubt there will be moments when the new Senate minority leader will marshal his democratic colleagues to block legislation.  However, when it comes to matters of finance and banking,  Senator Schumer is no progressive, and his willingness to work with the incoming President is worrisome.



In recent days, the Democratic senator has voiced his support for Mr. Trump’s proposal to eliminate the “carried-interest” tax provision, which benefits investment managers who specialize in private equity and real estate.  This provision of the tax code converts income earned from private equity or real estate funds into capital gains.  Through the magic of the tax code, those gains get taxed at 20% instead of  39.6%.  At first blush it seems that the President-elect and Senator are reformers because they’re in favor of closing a Wall Street loophole.  Don’t be fooled.  Financial interests fund the Senator’s political clout (see, the chart immediately below), and Messrs.’ Trump and Schumer aren’t crossing a key constituency.

 
 Source: OpenSecrets. Org

The President-elect’s tax proposals eliminate the benefit of the “carried interest” provision.  When the tax rate on ordinary income drops toward the tax rate on capital gains, the loophole becomes a meaningless appendage.  The President-elect can look like a reformer, and Senator Schumer can oppose the source of his political wealth without suffering any consequences.

Much of the President-elect’s agenda is going to cloak invidious proposals in apparent reforms.  Many Democrats will be tempted to join in the ruse.  Remain vigilant. 

Friday, November 18, 2016

For North Carolina’s Treasurer-Elect the Biggest Challenge is Judgment

For North Carolina’s Treasurer-Elect the Biggest Challenge is Judgment

After digesting the results of the recent election I began writing a post about the policy challenges facing the next Treasurer of North Carolina, Dale Folwell.  In preparing my post, I did a bit of research on the Treasurer’s-elect’s views about the state pension.  In the course of my research, I ran across a Facebook post from his campaign that caught my attention.  In celebrating his victory Mr.
Folwell encouraged his supporters to help him retire $500,000 in campaign debt.[1]   Early in the election cycle politicians routinely lend money to their campaigns in order to launch their  bid for public office.  Treasurers Boyles and Moore made small loans to their campaigns which we were retired as they raised funds.  Mr. Folwell did the same thing before going much further in funding his campaign.[2]


According to Mr. Folwell’s election committee at least $350,000 of the debt is owed to Mr. Folwell.[3]  Mr. Folwell probably loaned the remaining $150,000 to the campaign, but we won’t know until the campaign files its fourth quarter report in early 2017.  According to the third quarter report to the State Board of Elections Mr. Folwell’s campaign had raised about $585,000 from contributors, which means that the loans weren’t just for start-up expenses.  A substantial part of his campaign was run on loans.

On Mr. Folwell’s website, he describes himself as a “highly successful investor and financial consultant.[4]  While the loan is large, I figured that  Mr. Folwell could easily afford to make the loan given his statement about his investment prowess.  I decided to check the Investment Advisor Data Base to find Mr. Folwell’s investment affiliations and licenses.  I didn’t find any records.  I checked Mr. Folwell’s Statement of Economic Interest (SEI)[5] filed with the North Carolina Ethics Commission.  I expected the document to show a list of investments or investment income that would provide some indication of Mr. Folwell’s investment portfolio.  Instead of a broad  investment portfolio, I found that Mr. Folwell and his wife own five stocks, a checking account, a couple of homes, and some raw land.  In other words, there wasn’t much of a record for a “highly successful investor.”  Instead, the SEI seemed consistent with Mr. Folwell’s record of public service.

My research has left me with an unsettled feeling.  Our next Treasurer and sole fiduciary of the North Carolina pension plan has a large campaign debt that he’d like contributors to extinguish so he can pay himself back.  It’s less than ideal for a fiduciary to be under any financial pressure when he invests funds on behalf of retirees and other beneficiaries.  On the one hand, paying off the debt may prove easy because contributors might feel they can buy influence by helping the new treasurer replenish his bank account.  On the other hand, he might not be able to eliminate the debt, which would be a blow to his personal financial position.  In other words, Mr. Folwell might have a large hole on his personal balance sheet unless financial institutions, PACs, or others who do business with his office erase the campaign loans.

As a seasoned politician, Mr. Folwell understands that running an effective statewide election requires a substantial amount of money.   Without money, it is difficult to win office in our current political environment.  However, certain means of financing a campaign are problematic, especially when the candidate is running for an office that is predicated upon judgment, prudence, and foresight.  As a “highly successful investor” the newly elected Treasurer should have  known that a high degree of leverage is a risky proposition.  He should have also been aware that soliciting campaign contributions to retire a substantial debt creates potential conflicts of interest with his new duties.

Judgment is the key ingredient for a successful fiduciary.  After seven years in office, our current Treasurer’s judgment failed her.   Treasurer Cowell saw nothing wrong in serving on the boards of public companies while managing the 12th largest pension plan in the United States.  In my view, our new Treasurer’s judgment is already in question.  Mr. Folwell enters office with a large campaign debt hanging over his duties as State Treasurer.